Murdoch Chirps While DirecTV Clicks

2/09/2007 7:00 PM Eastern

By: Mike Farrell

New York— News Corp. chairman Rupert Murdoch seems pretty pleased with his decision to sell a controlling interest in DirecTV Group to John Malone’s Liberty Media, even if the leading U.S. satellite-TV provider ended the year strongly.

News Corp. agreed on Dec. 22 to exchange a 38% stake in DirecTV, $550 million in cash and three regional sports networks for Liberty Media’s 19% voting interest in News Corp. Valued at about $11 billion, the exchange is expected to close in the second half of the year.

Murdoch, on a conference call with analysts Feb. 7 to discuss News Corp. results, pointed out that the deal was the equivalent of a $4.8 billion tax-free gain on a three-year-old investment (for which it spent about $6.6 billion).

On the Beam

Operating highlights for News Corp. and DirecTV:

SOURCE: The companies

News Corp.

Fiscal 2Q

Revenue

$7.8 billion

Operating Income

$1.1 billion

Net Income (Loss)

$822 million

DirecTV Group

Fiscal 4Q

Revenue

$4.18 billion

Cash Flow

$915 million

Net New Subscriber Additions

275,000

EQUAL TO 16% BUYBACK

The voting stock News Corp. is getting from Liberty amounts to a 16% stock buyback accomplished at once without having to pay a premium, he said. The company’s current share-repurchase program would have taken 18 months to buy back that much stock. And by not using a significant portion of $5.4 billion in cash and cash equivalents to buy back those shares, News Corp. gains financial flexibility for strategic investments — or to buy back even more stock.

“I don’t see any better use of our cash right now than to buy back News Corp. shares,” Murdoch also said.

While extolling the deal, Murdoch took pains to voice continued support for News Corp.’s satellite-TV businesses in other parts of the world. News Corp. still owns a controlling interest in British Sky Broadcasting Group, the largest pay television service provider in the United Kingdom, and controls Sky Italia, the satellite television service provider in Italy.

“The U.K. and Italy, both markets where we have clear market leadership, I’m extremely bullish on their futures,” Murdoch said.

And while he didn’t come right out and say it, Murdoch’s much-different view of the U.S. satellite business was evident in a Securities and Exchange Commission filing earlier last week, providing more details about the negotiations with Liberty.

The two had been in informal negotiations ever since Liberty acquired the voting stake in December 2004 — without notifying Murdoch in advance, an oversight that seemed to irk him. But the talks went nowhere for about two years, until the DirecTV interest came into play.

News Corp. filed the SEC document, a preliminary proxy statement, last Monday, as required by Australian Stock Exchange rules. News Corp. did not release the date or location of the shareholders meeting to vote on the deal. That should come in later filings.

Deal approval still requires a majority vote of shareholders other than the Murdoch family and Liberty Media.

When News Corp. bought the controlling interest in DirecTV from Hughes Electronics in 2003, it caused much concern among cable operators and investors that Murdoch’s company would use its combined programming assets and satellite distribution to crush the competition.

But less than three years after making the sale, DirecTV’s subscriber growth had started to decline and cable’s triple-play package of voice, video and data had begun to gain steam. And News Corp. made the decision to try something new.

The proxy filing said the search for strategic alternatives began in early 2006, “in light of company management’s belief that the DirecTV business faced several strategic, competitive and technological challenges.”

The satellite giant’s inability to develop a broadband product was a big part of the changed equation.

That was evident in News Corp.’s explanation in the SEC filing as to why the board decided to unload DirecTV.

Two out of the five benefits the board saw to a DirecTV deal involved significant investments required to keep DirecTV competitive and management’s belief that U.S. satellite-TV providers “are not able to, through their existing infrastructure, provide high-speed broadband Internet access at a reasonable price.”

EUROPE’s DIFFERENT

On the Feb. 7 analysts’ call, Murdoch pointed out that broadband business dynamics are much different in other satellite-TV markets. BSkyB, for example, has its own fiber network across Britain. And although European law requires that the last mile into the home be provided by the incumbent telephone company, the incumbent offers up that access to competitors at a low wholesale rate.

“Broadband has become somewhat of a commodity, in fact, across Europe,” Murdoch said.

News Corp.’s growing distaste for DirecTV likely wasn’t solely because of its broadband difficulties. Satellite subscriber growth, once tops in the pay TV universe, had begun to plateau.

And while cable operators had thoughts DirecTV might be used to launch scores of exclusive channels, it was soon apparent the direct-broadcast satellite provider’s 15.95 million customers alone weren’t enough to viably launch a network.

STRONG NUMBERS

Coincidentally, even as News Corp. was patting itself on the back for a deal well done, DirecTV released quarterly results on Feb. 7 that beat analysts’ expectation on nearly every metric.

Revenue in the quarter was up 16%, to $4.18 billion, and operating income before depreciation and amortization (OIBDA, a measure of cash flow) more than doubled, to $915 million.

DirecTV also added 275,000 net new subscribers in the quarter, a 38% increase over gains in the same period in 2005 and 110,000 better than the 165,000 subscribers added in the third quarter.

The monthly subscriber disconnect rate, at 1.57%, was below 2005 fourth-quarter churn of 1.7% and the lowest level in three years.

DirecTV credited its plan to focus more on high-quality subscribers and advanced services.